< Previous | Contents | Next >
NATIONALISATION AND DEVELOPMENT OF BANKING IN INDIA
The development of banking industry in India has been intertwined with the story of its nationalisation. Once the Reserve Bank of India (RBI) was nationalised in 1949 and a central banking was in place, the government considered the nationalising of selected private banks in the country due to the following major reasons:
(i) As the banks were owned and managed by the private sector the services of the banking were having a narrow reach—the masses had no access to the banking service;
(ii) The government needed to direct the resources in such a way that greater public benefit could take place;
(iii) The planned development of the economy required a certain degree of government control on the capital generated by the economy. Nationalisation of banks in India took place in the following stages:
The Government of India, with the enactment of the SBI Act, 1955 partially nationalised the three Imperial Banks (mainly operating in the three past Presidencies with their 466 branches) and named them the State Bank of India—the first public sector bank emerged in India. The RBI had purchased
92 per cent of the shares in this partial nationalisation.
Satisfied with the experiment, the government in a related move partially nationalised eight more private banks (with good regional presence) via the SBI (Associates) Act, 1959 and named them as the Associates of the SBI—the RBI had acquired 92 per cent stake in them as well. After merging the State Bank of Bikaner and the State Bank of Jaipur as well, the RBI came up with the state Bank of Bikaner and Jaipur. Now the SBI Group has a total number of six banks—SBI being one and five of its associates.
Emergence of Nationalised Banks
After successful experimentation in the partial nationalisations the government decided to go for complete nationalisation. With the help of the Banking Nationalisation Act, 1969, the government nationalised a total number of 20 private banks:
(i) 14 banks with deposits were more than Rs. 50 crore of nationalised in July 1969, and
(ii) 6 banks with deposits were more than Rs. 200 crore of nationalised in April 1980.
After the merger of the loss-making New Bank of India with the Punjab National Bank (PNB) in September 1993, the total number of nationalised banks came down to 19. Today, there are 27 public sector banks in India out of which 19 are nationalised (though none of the so-called nationalised banks have 100 per cent ownership of the Government of India).
After the nationalisation of banks the government stopped opening of banks in the private sector though some foreign private banks were allowed to operate in the country to provide the external currency loans. After India ushered in the era of the economic reforms, the government started a comprehensive banking system reform in the fiscal 1992–93. Three related developments allowed the further expansion of banking industry in the country:
(i) In 1993 the SBI was allowed access to the capital market with permission given to sell its share to the tune of 33 per cent through SBI (Amendment) Act, 1993.
At present the Government of India has 59.73 per cent shares in the SBI. (It was on 9 July, 2007 that the entire equity stake of the RBI was taken over by the Government of India. Thus, the RBI is no more the holding bank of the SBI and its Associates.)
On 10 October, 2007 the government announced its proposal of selling the shares of the SBI and cutting down its stake in it to 53 per cent level so that the bank can go for capitalisation.
(ii) In 1994 the government allowed the nationalised banks to have access to the capital market with a ceiling of 33 per cent sale of shares through the Banking Companies (Amendment) Act, 1994.
Since then many nationalised banks have tapped the capital market for their capital enhancement—Indian Overseas Bank being the first in the row. Though such banks could be better called the public sector banks (as the Government of India holds more than 50 per cent stake in them) they are still known as the nationalised banks.
(iii) In 1994 itself the government allowed the opening of private banks in the country. The first private bank of the reform era was the UTI Bank. Since then a few dozens Indian and foreign private banks have been opened in the country.
Thus, since 1993–94 onwards, we see a reversal of the policies governing banks in the country. As a general principle, the public sector and the nationalised banks are to be converted into private sector entities. What would be the minimum government holding in them is still a matter of debate and yet to be decided.19 The policy of bank consolidation is still being followed by the government, so that these banks could broaden their capital base and emerge as significant players in the global banking competition.20 Every delay in it will hamper their interests, as per the experts.